The pressure is closing in on the Ten Network’s Canadian owner, Canwest.
It has a series of financial tripwires to negotiate this week, led by the Wednesday night (Australian time) deadline for an interest payment to its bond holders, that in turn could be blocked by the more highly secured holders of its bank debt, who remain unpaid.
At the same time last week’s poor financial results for the first quarter has moved the company closer to trigger defaults on several of its loan agreements.
It cut the value of its Canadian newspapers by $C1.6 billion, six months after it chopped the value of its Canadian TV businesses by around $C1.1 billion. That $C2.7 billion cost means the companies debt now towers over its assets by a ratio of around two to one.
The company said that for the first six months of the 2009 financial year, revenues fell 3% to $C1.52 billion and operating profit before restructuring and impairment expenses declined by 22% to $C295 million.
“For the three months ended February 28, 2009, the Company reported a net loss of $1.44 billion – including a non-cash $1.19 billion write-down of goodwill, intangible assets and property and equipment. Approximately 83% of the write-down relates to Canwest’s Publishing operations. For the six months ended February 28, 2009, the Company reported a net loss of $1.47 billion.”
That must have sent the banks and other creditors scrambling for their “mood enhancers”.
The company continues to bleed red ink, the Ten Network is not as profitable as it was (loss making after its write-downs, reported 10 days ago) and Ten has chopped its dividend sharply to just 2 Australian cents a share, meaning a sharp fall in income for the parent. Ten’s slump in revenues and earnings has also produced a fall in operating cash flows from Australia, which have hit at the same time as cash flows from Canadian newspapers, TV and other businesses contract sharply.
Canwest last secured a two-week extension on talks with its banks, now it faces an April 15 deadline to make a $C30.4-million interest payment to its bondholders.
It is unlikely this payment will be made as to do so would see it stopped by the banks who would claim it for their accounts. That in turn would trigger legal action and a probable default on the notes, which would in turn plunge the company and its $C3 billion plus debt into a death spiral.
But should the bondholders not receive their interest payment, they would be in a position to demand immediate repayment on about C$761-million worth of notes, which could force the company into receivership unless a settlement can be negotiated. The bondholders want a solution that keeps the company out of insolvency.
There’s talk the company’s largest shareholder, Fairfax Financial will help recapitalise the company, but at a cost. Fairfax wants Canwest to end its dual voting structure that keeps the Asper family in control.
But Canadian broking and media reports say Canwest is under more pressure:
The Globe and Mail reports that CanWest has broken a bank covenant that that requires the holding company of its operations, CanWest Media Inc., to keep its debt below 5.75 times EBITDA (earnings before interest, taxes, depreciation and amortization.) The company told shareholders in last week’s second quarter report that ratio is now at 6.35.
And the company is now on the verge of breaking yet another covenant. Debt at its newspaper arm, CanWest LP, must stay below 5.75 times EBITDA, but the ratio climbed to 5.66 times in the most recent quarter as advertising income slumped 16%. That covenant will be breached this quarter unless the company can cut debt somehow.
CanWest is holding the talks in an effort to stave off a potential filing for protection from its creditors, but Canadian analysts wonder whether it has the room to create a” deal”. It has no room on debt and its cashflow and liquidity are weakening sharply. Asset cover is shot. the Ten assets are part of the covenants on the deal with bondholders, so they can’t be sold.
Canwest’s comments about the outlook were hardly encouraging:
Looking forward, the Company anticipates that advertising revenues will continue to be negatively impacted by persisting uncertain economic conditions, with the exception of specialty channels and digital sectors. Canwest remains focused on reducing operating expenses and improving operational efficiencies while pursuing the reorganization of its capital structure as referred to below.
Failure to reach agreement on a further waiver from the senior lenders and forbearance from the holders of the senior subordinated notes could result in a demand to immediately repay the related debt.
It’s all a question of how many times the bondholders and banks are prepared to give the company wriggle room to sell something no one wants to buy.